EFiled: Feb 29 2008 5:50PM EST Transaction ID 18813428 Case No. 3502-VCN IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE WILMINGTON TRUST COMPANY, : as Indenture Trustee for Tropicana : Entertainment, LLC and Tropicana : Finance Corp. 9 5/8% Senior Subordinated : Notes Due 2014, directly, and derivatively : on behalf of TROPICANA : ENTERTAINMENT, LLC, : : Plaintiff, : : v. :C.A. No. 3502-VCN : TROPICANA ENTERTAINMENT, LLC, : TROPICANA FINANCE CORP., : AZTAR CORPORATION, WILLIAM J. : YUNG, III and DONNA MORE, : : Defendants. : MEMORANDUM OPINION Date Submitted: February 26, 2008 Date Decided: February 29, 2008 Carmella P. Keener, Esquire of Rosenthal, Monhait & Goddess, P.A., Wilmington, Delaware; and Edward S. Weisfelner, Esquire, Sigmund S. Wissner-Gross, Esquire, Robert J. Stark, Esquire, and May Orenstein, Esquire of Brown Rudnick Berlack Israels LLP, New York, New York, Attorneys for Plaintiff. Gregory P. Williams, Esquire, Robert J. Stearn, Jr., Esquire, and Richard P. Rollo, Esquire of Richards, Layton & Finger, P.A., Wilmington, Delaware; Michael L. Hirschfeld, Esquire and David R. Gelfand, Esquire of Milbank, Tweed, Hadley & McCloy LLP, New York, New York; and Jerry L. Marks, Esquire of Milbank, Tweed, Hadley & McCloy LLP, Los Angeles, California, Attorneys for Defendants Tropicana Entertainment, LLC, Tropicana Finance Corp., and Aztar Corporation. NOBLE, Vice Chancellor Almost one billion dollars of unsecured debt was borrowed by the acquirer of a casino in Atlantic City, New Jersey. That acquirer and its casino-operating subsidiary have now lost their essential gaming licenses. Although the loss of the gaming licenses does not constitute an event of default under the controlling indenture, the question framed by cross-motions for summary judgment filed by the Indenture Trustee and the Issuers is whether the collateral consequences from the loss of the gaming licenses precipitated an Event of Default. I. BACKGROUND A. The Commercial Parties By an Indenture,1 dated December 28, 2006 (and supplemented on January 3, 2007 and October 10, 2007), Tropicana Entertainment, LLC (“Trop Entertainment”) and Tropicana Finance Corp. (“Trop Finance”) (sometimes collectively together with Aztar Corporation (“Aztar”), either “Tropicana” or the “Company”) issued $960 million in principal amount of 9-5/8% Senior Subordinated Notes Due 2014 (the “Notes”). The borrowed funds were used in part to acquire the Tropicana Atlantic City Casino. The casino assets were held by Adamar of New Jersey, Inc. (“Adamar”), a wholly-owned subsidiary of Ramada New Jersey Holdings Corporation (“New Jersey Holdings”), which had been held by Aztar, before its acquisition by Trop Entertainment and related entities. 1 Transmittal Affidavit of Richard P. Rollo, Esquire (Feb. 5, 2008) (“Rollo Aff.”) Ex. C. 1 Wilmington Trust Company (the “Indenture Trustee”) serves as the successor trustee under the Indenture and, on January 28, 2008, on behalf of a majority of the holders of the Notes (the “Note Holders”) delivered a Declaration of Acceleration and Notice of Default because of alleged defaults under Section 5.01(c) and Section 4.06 of the Indenture.2 This action followed, and Tropicana has moved for partial summary judgment, seeking a declaration that no default has occurred. The Indenture Trustee, by its motion for partial summary judgment, now seeks judicial determination that an Event of Default has occurred or will occur if the default is not cured within sixty days of notice. B. A Brief and Superficial Consideration of Pertinent Aspects of New Jersey’s Gaming Laws Because this dispute arises at the intersection of New Jersey gaming law and the Indenture, a brief introduction to relevant provisions of the New Jersey gaming law may be helpful to gaining an understanding of how this controversy developed. The basic corporate hierarchy for a large casino operation has a parent entity that must obtain a plenary casino license; the parent owns a holding company that has as its only asset the stock of the operating company, which owns the casino assets and also holds the gaming license. 2 Rollo Aff. Ex. K. A second Declaration of Acceleration and Notice of Default was transmitted on February 20, 2008. Transmittal Affidavit of Carmella P. Keener, Esquire (Feb. 22, 2008) (“Keener Aff.”) Ex. A. 2 A casino in Atlantic City is a highly regulated venture. When an entity seeks to acquire a casino, it must apply under the New Jersey Casino Control Act (the “Act”)3 for Interim Casino Authorization (“ICA”)4 from the New Jersey Casino Control Commission (the “Commission”). The applicant may close on its acquisition after it receives ICA approval, but it is not allowed to hold—although it may operate and profit from—the casino assets. Instead, a neutral trustee (the “ICA Trustee”), acceptable to the Commission, receives and holds in trust (the “ICA Trust”) all of the applicant’s present and future right, title and interest typically to either a holding company (which holds the operating entity) or to the operating entity itself. The ICA Trust, subject to Commission oversight, serves a limited function which allows the applicant to operate the casino while the permanent licensing process is ongoing. If the permanent gaming license is issued, the ICA Trust dissolves. If, however, the applicant is denied a permanent license, the ICA Trust becomes “operative,” and the applicant loses all right to control, operate, or profit from the assets in the ICA Trust; in that event, the ICA Trustee manages the casino business and is obligated to sell the trust assets within 120 days or such longer period as the Commission may specify. It is through the ICA Trust provision that New Jersey exercises its police powers over new applicants in order to assure that they are qualified to operate a casino, and it also meets its economic 3 N.J.S.A. § 5:12-1, et seq. 4 See generally N.J.S.A. § 5:12-95.12 through -95.16. 3 development objectives by assuring the continued operation of the casino through the ICA Trustee in the interim until a replacement operator can be put in place. Entities which hold gaming licenses must go through a license renewal process every five years. If, for example, a casino operator loses its gaming license, a conservator is appointed by the Commission.5 By New Jersey law, “[u]pon his appointment, the conservator shall become vested with the title of all property of the former or suspended licensee relating to the casino and the approved hotel . .”6 The conservator also is charged with responsibility for operating the casino assets and arranging for their sale. The ICA Trustee, after the ICA Trust becomes operative, and the conservator serve similar purposes although their powers and how they interact with the applicant or licensee differ in significant ways. C. Trop Entertainment Acquires the Tropicana Atlantic City Casino and Encounters Problems By an agreement dated May 19, 2006, Trop Entertainment,7 or its affiliates, agreed to acquire all of the equity of Aztar which was then the ultimate parent of Adamar, which was, in turn, the direct owner of the casino and held the gaming license that allowed for its operation. The Company filed an application for an 5 See generally N.J.S.A. 5:12-130.1 through -130.11. 6 NJSA § 5:12-130.2(a). 7 Some of the entities were known by different names then. For convenience, current names are used in lieu of proper historical nomenclature 4 ICA with the Commission on June 6, 2006. As required by New Jersey law, it executed an ICA Trust Agreement on October 16, 2006.8 The Commission issued to the Company an ICA permit and approved the ICA Trust Agreement on November 2, 2006.9 The Indenture, dated December 28, 2006, authorized the issuance of the Notes which allowed the acquisition by Trop Entertainment to close on January 3, 2007. At that time, all shares of Adamar were to have been issued to the ICA Trustee, The Honorable Gary S. Stein (“Justice Stein”). For reasons that do not matter, the stock certificate for all shares of Adamar was not actually delivered to him until approximately two months later.10 Both the Company’s application for plenary qualification as a holding company of the casino and Adamar’s five-year license renewal came before the Commission in the fall of 2007.11 On December 12, 2007, the Commission found the Company to be “unqualified” and denied its application.12 As a result, the ICA Trust became “operative.”13 Furthermore, by the December 12 Order, the Commission denied Adamar’s renewal application and recognized that it would be 8 Rollo Aff. Ex. F. 9 Rollo Aff. Ex. E. 10 Affidavit of Hon. Gary S. Stein (Feb. 8, 2008) (“Stein Aff.”) Ex. C. 11 The Company (through Tropicana Casino and Resorts, Inc.) had applied for plenary qualification as a holding company for Adamar. Adamar had applied for renewal of its casino and casino alcoholic beverage licenses. 12 Rollo Aff. Ex. G. 13 Rollo Aff. Ex. H (the “December 12 Order”). 5 necessary to appoint a conservator. By order dated December 19, 2007,14 the Commission appointed Justice Stein, as conservator. Thus, Justice Stein serves as both ICA Trustee and conservator. D. The Indenture The rights which the Indenture Trustee seeks to enforce are established, of course, by the Indenture. The Indenture Trustee relies upon two substantive provisions for its claim that there has been a default. By Section 5.01(c), “the Company shall not permit any Notes Guarantor to . convey, transfer or lease, in one transaction or series of transactions, all or substantially all of its assets to any Person unless: [certain conditions that are not met in this matter are satisfied].”15 Section 4.06 of the Indenture provides in part as follows: “Limitation on Sales of Assets and Subsidiary Stock.